It’s time for a new battle near 1415. (And it has nothing to do with Agincourt.)
The 1415 to 1425 level brackets the April 2, 2012 high for the Standard & Poor’s 500 at 1419.04. And market optimists and pessimists have totally different reads on what the approach to that number means for the direction of the market over the next few weeks.
The optimists include technical analysts who have been cheered over the last week or so as the index climbed into a position to challenge the April high—and as participation in the rally has broadened to include more groups. For example, while the big cap S&P 500 index moved above its 50-day moving average in early July, the small cap Russell 2000 index moved below that important indicator of support in late July and then again in early August. Just as small cap stocks often lead the early stages of a stock market rally, they often signal the start if a market down turn.
And for the first days of August that drop in the small cap Russell index was enough to rouse concern that the market might be about to retreat without ever challenging its April high. That would have raised fear to anther level since the failure of a rally below the last high can indicate that a market is about to begin a steady march lower.
But last week saw the rally broaden to include small cap stocks and other groups that had started to lag. The Russell 2000, for example, finished the week above 801.55 and back above its 50-day moving average.
A number of the technicians that I follow, Dan Sullivan at TheChartist.com and John Murphy at StockCharts.com began to talk about a move above 1419 for the S&P 50 as likely and to speculate that a move above that level would trigger a buy in their systems for U.S. stocks.
On the other hand—and in this market there’s always an other hand—fundamental, news-oriented investors have started to see 1415 or so as the level at which they’d sell. This group sees the rally to date as based on wishful thinking about the solutions to the Euro debt crisis proposed by the European Central Bank’s Marie Draghi. They see European economic growth as grinding ever slower and they worry that the slowdown in China’s economic growth evidenced in last week’s disappointing reports on retail sales and industrial production isn’t good news because it makes further stimulus by the People’s Bank of China more likely but as bad news because it indicates that the stimulus to date hasn’t had much effect.
They point to data showing, for example, that in May money started to flow out of the core Euro economies and not just out of the peripheral countries. That, these investors say, is a sign that the Euro debt crisis is moving to another stage, one that will lead to slower growth in even formerly strong core economies such as Germany.
If it weren’t August, I think this difference of opinion would get resolved relatively quickly. We either see negative news that would validate the position of the pessimists or we wouldn’t.
But it is August. In August news flow slows down—Germany Chancellor Angela Merkel is on her annual hiking trip in the Tyrol, for example—and in the United States political news in the run up to the early September national conventions for Democrats and Republicans is likely to push economic news off the front page.
August trading volumes are also relatively low, and that historically has given traders a chance to force market moves.
In the two weeks ahead, I’d be looking for traders to try to use the difference in opinion at 1420 or so and low August volumes to try to whipsaw the market in one direction and then the other.
Try to keep your emotions in check. In the absence of meaningful news, late August volatility won’t mean much of anything.
I’m going to try to take my annual two-week August vacation over the next two weeks. Recognizing the volatility in the current market, I’m not even going to pretend that I won’t be posting every day. I will in order to give you my opinion on what’s real news and what’s trader news. I will try to reduce my posting frequency so that I can spend some time with the kids at the pool. We’ll see how that goes.
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